Many of us know one or two people who cannot handle money.  Some folks struggle with addiction to substances or gambling.  Others chronically overspend, entrust their money to charlatans, or give away more than they can afford.  A person can be honest, hardworking, and a walking financial disaster.

If you have a child who fits one of these descriptions, you may have wondered whether you should leave him or her anything in your estate plan.  You may be concerned about enabling addictive behavior.  Or, you may wonder whether a bequest would actually benefit your child at all, versus enriching a few creditors.

safesOne potential solution is to set up a “spendthrift trust” for your financially-challenged child.  In a spendthrift trust, the trustee—typically a bank, professional fiduciary, or responsible family member—will manage your bequest for your child’s benefit.  The trustee will have the authority to manage the trust and make or withhold distributions by applying the standards you include in the trust document—for example, to invest the trust assets wisely and make distributions only for your child’s bona-fide needs (such as housing and health care).  This will help protect your child from making poor financial choices.

What about your child’s creditors?  As a general rule, your child’s creditors seize any money that the child actually receives.  For that reason, the trustee should be given discretion to withhold any payments that would be seized by creditors.  The trustee should also be allowed to pay rent, health insurance, tuition, etc. directly to the landlord, insurer or other institution on your child’s behalf.  This will ensure that the money is applied to its intended purpose, and frustrate any creditor who attempts to seize the money as it passes through your child’s bank account.

In California, the funds that remain in the trust itself—i.e., that have not been distributed—are generally immune from the child’s creditors if the trust is set up correctly.  The theory is that since this was your money, you should be able to decide who receives it.  But, a spendthrift trust in California is subject to the following rules:

  • First, the child cannot have control over the trust or over the money within it. A financially-challenged person should not be a trustee of the trust, as this could make it vulnerable to his or her creditors (not to mention the child’s own poor financial judgment).
  • During the child’s lifetime, the trustee may distribute enough trust assets to cover the child’s “education and support.” These are the “magic words” to protect the trust from the claims of the child’s creditors.  And, they mean what they say.  The trustee may distribute money to help support the child in his or her usual “station in life.”  But, the trustee would not be able to write checks to enable the child to buy a Ferrari.  Creditors can seize amounts in excess of amount needed to support the child in his or her usual station in life.
  • And, your child’s creditors will also have a limited opportunity to seize 25% of any amount payable to your child, even under the “education and support” standard. (This loophole was recently added to give creditors the same rights to garnish trust distributions that they already have to garnish wages—the idea being that trust fund babies should not be favored over working people.)  But, this would require a lawsuit in civil court.  Many creditors are not motivated enough to take the steps needed to do this.

A spendthrift thrust is not a panacea.  But, it can be a useful tool for someone with a financially-challenged family member.

This is a general overview and not to be confused as legal advice. If you would like to speak to Jonathan about estate planning, legal, business or tax matter, please email him at or call him at (925) 217-3255.